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SMA Solar Technology, Danfoss A/S form strategic partnership

26 February 2014

€302,38 million deal will create one of the world’s largest converter alliances.

SMA Solar Technology and Danfoss A/S — the two leading system technology specialists — aim to take full advantage of economies of scale and joint development initiatives. In addition, Danfoss acquires 20% of SMA’s outstanding shares and plans to sell its complete solar inverter business to SMA.

With the acquisition of Danfoss’ solar inverter business, SMA will increase the attractiveness of its product portfolio. After the completion of the transaction, SMA will launch new products for the fast growing market segments of medium-sized PV plants in Europe, China and the USA.

Faced with a highly competitive market environment and increased price pressure, SMA should benefit from Danfoss’ years of experience in automated drives, Pierre-Pascal Urbon, SMA CEO explained. Accordingly, the strategy of the Danfoss group targets continuous cost improvements through global sourcing and cost down initiatives. “By establishing a close cooperation, there is significant potential to improve the cost position in both companies,” Urbon stated.

Niels B. Christiansen, president and CEO of Danfoss, concurred, adding that the goal is to drive innovation and competitiveness by integrating Danfoss’ know-how from the drives technology to the PV inverter business. “Danfoss will certainly benefit from economies of scale and the high growth rates of the solar industry,” he stated.

Under the terms of the deal, valued at €302,38 million, Danfoss acquires 6.94 million of SMA shares at a price of €43.57 per share from the SMA founders, their trusts and families. The cash consideration corresponds to a premium of 50% to the volume-weighted average share price over the last 60 days. After completion of the transaction, the freely tradable free float of the SMA share will be at 25.05%. The SMA founders, their trusts and families will hold 54.95% of the SMA shares after the transaction is completed. Note: Danfoss will not buy or sell shares for a lock-up period of at least 2 years. The share purchase is subject to regulatory approval. Closing of the acquisition of shares and the cooperation contract is expected within Q3 2014.

Analysts’ assessment

The announcement of the SMA/Danfoss deal highlights the on-going consolidation of the European solar manufacturing business in a declining domestic market, according to Ash Sharma, senior director – Solar Research, HIS. The tie-up, Sharma notes, does not come as a huge surprise given the struggles the industry currently faces as it deals with a shrinking European market, rapid price declines but conversely booming overseas demand.

Combined, SMA and Danfoss held a 25% share of the global solar inverter market in 2013 (down from 35% in 2012) and more than 35% of the European market, IHS estimates. This tie-up undoubtedly strengthens their position but also provides SMA with other benefits, Sharma notes. First, the alliance will open up a cheaper supply of components to SMA via Danfoss’ much greater purchasing power. (This alone will drive down SMA’s bill of materials.) In addition, SMA has access to Danfoss’ manufacturing facilities, which will further allow SMA to drive down costs using Danfoss’ economies of scale. This will become even more critical to manufacturers as government incentives for solar continue to drop and competition from low-cost Chinese vendors intensifies, Sharma noted.

Second, IHS notes, this deal allows SMA to take advantage of Danfoss’ design and manufacturing expertise. As Sharma explains: “Technically, solar inverters are very similar in design to drives, which Danfoss has manufactured for more than 40 years. Danfoss’ background in the drives industry allowed it to very quickly make advances in the solar inverter industry, and it was one of the first suppliers of three-phase string inverters which revolutionised commercial solar projects. This experience and know-how will likely prove incredibly valuable as SMA seeks to advance inverter designs whilst driving down costs.”

Third, Sharma notes, as the solar industry globalises and new end-markets appear in a vast number of emerging countries, suppliers of solar products will need to have a global footprint — not just for sales but perhaps more importantly for after-sales service. “Whilst SMA was already the largest solar inverter supplier prior to this deal with a presence in most of the key markets, this deal will further strengthen this position," Sharma stated. "Danfoss has more than 23,000 employees in 51 countries and will allow SMA to more effectively serve the quickly developing emerging markets of Latin America, Middle East and Asia.”

Despite the advantages, the deal also brings its share of challenges, according to IHS. As Sharma explains, there is considerable overlap between SMA’s and Danfoss’ inverter business. “Both were largely focussed on the European market with 55-60% of their 2013 business coming from this region," he explained. "They also have a very similar product line-up, both with particular strength in three-phase string products for commercial and utility-scale PV installations.”

Sharma also believes — despite having access to Danfoss’ enhanced procurement — that SMA will still face intense challenges from low-cost suppliers from China who benefit both from low-cost components sourced in China and also huge economies of scale given their booming domestic market. Furthermore, Sharma notes, the partnership with Danfoss will not improve SMA’s position in the China and Japan solar markets which will account for nearly 50% of all PV installations in 2014.

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